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What is Islamic (interest-free) Microfinance?
Islamic development philosophy: Diffusion of development benefits,
equitable income distribution
Private investment in Islam is of a dualistic nature, benefiting the
investor & the community / investment provides the basic needs first.
Islamic interest-free MF builds on Shariah principles. Interest (on
saving & lending) is prohibited. Investment is made with mainly
sales-based, partnership & leasing formulae.
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Merits of interest-free (Islamic)Microfinance
It considers treatment of povertyas part of its social responsibilities
It does not need strong guarantees
The Islamic formulae have no harmful financial burdens in cases of
loss, Partnership does not leave the partner with debts, nor does it obligate
him to pay in the case of a loss.
the Islamic MF is less difficult for customers to recover debts in cases
of failure by granting a grace period without additional financial charges.
Islamic MF operates via a No. of financing formulae which suit the
targeted group / the type of projects (Ijara,Murabaha,Musharaka).
It includes Zakat, Wagf, Qard Hassan which can complement (but not
replacing) theIslamic microfinance in providing housing & necessities.
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Opportunities in breaching the gap in Islamic MF &
tapping into the potential market (Thecase of African )
In 16 states of Sub-Saharan Africa (out of 47) Muslim population are
50%+/53% (582 mill./out of 1097) estimated Muslims in Africa.
A scope for the same in Zambia, Uganda, Malawi, Ghana & Ethiopia.
Many African countries have interest-free activities e,g. Botswana, Kenya,
Gambia, Guinea, Niger, Nigeria, S. Africa, Mauritius, Senegal & Tanzania.
Slow interest-free MF market penetration in SSA.
There are some interest-free practices in Africa (Murabaha&leasing),
Regulatory frameworks for interest-free finance in Ethiopia & Tanzania.
Three are interest-free MFIs in some African states such as Ethiopia.
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Challengesin expanding the reach or scaling up Islamic MF
Islamic MF experiences were short lived / not integrated into the financial
system. Lack of a workable Islamic MF model worldwide.
Models act as charity funds, no sign of market-orientation & outreach
Most have limited outreach, and are perhaps not sustainable.
Nosupport bythe governmental regulatory framework.
Training of Islamic MF providers & awareness for potential clients.
No need for a stringent Interest-free MF system, i.e. interest-free model in
non-Muslim states needs tobe a "business" not "religious" model.
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The suitable mechanisms/avenues to introduce interest-free
MFin a mixed & pure interest-basedfinancing system?
1. Separate Branches (preferable; commonly used)
2. Separate Windows,
3. Wholesaling with Interest-Free MFIs (preferable,needsApex)
4. Partnership Between MF Funders & the Interest-Free MF Providers
5. Separate Affiliate Company of the Interest-BasedMFI.
A regulatory framework/or special financing policies are required.